Key US stock indices ended Monday without major changes. The stock market continues to experience another round of a correction. The current correction is rather weak, since the cumulative drop from all-time highs is minimal and the indices have not yet reached the previous local lows. Nevertheless, most experts predict that the correction will continue this year. As mentioned earlier, the year 2022 promises to be very challenging for the stock market due to the fact that the Fed is going to raise its key interest rate several times and wind down the QE program in March. Thus, fund flows into the stock market will dry up, and the return on other, less risky assets will increase. This, in turn, will reduce demand for shares again. This view is shared by many market participants, including Catherine Wood, chief executive officer of ARK Investment. The ARK founder said that the Nasdaq and S&P 500 could be the bigger disappointment to return-eager investors in the longer-term, because they are too overvalued. She drew attention to the shares of innovative companies (for example, ETFs). According to her, they could bring huge profits.
At the same time, some market players believe that the Fed will not be able to get inflation under control with the help of the measures it has planned for the current year. According to many experts, interest rate hikes and a withdrawal of monetary stimulus will not help solve the problem of supply chains and ease the impact of the pandemic on the economy, demand, and supply. Thus, US inflation may remain high till the end of 2022. For now, it is difficult to predict the reaction of investors and traders to this fact. If inflation falls back to 2% by the end of this year, the stock market will undoubtedly correct significantly. In case inflation remains high, it would buoy demand for the most popular stocks, whose income is determined by their constant growth in value rather than by dividend payments. In other words, if inflation is high, Apple or Microsoft stocks (and other benchmark stocks) will most likely continue to advance, keeping key stock indices from falling heavily. Thus, now a lot depends on the inflation rate Fed officials will try to influence. Notably, the majority of Fed members said they were ready to support at least three rate hikes in 2022, and some spoke in favor of four increases. Inflation rose to 7%. For now, it is unlikely to slow down its growth.
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.
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